A question we often get from our clients is:
“How do I know which type of loan(s) I should take?”
There are several different types of loans out there. Some business owners choose to take a five-year term loan, similar to a car loan, with fixed interest and payments. Other owners opt for options that only require payment if they’re used; such as revolving credit lines, or business credit cards that are revolving. Some choose options outside of these as well.
Let’s take a look at an example:
If you’re starting a brand-new business and you know you’re going to have to buy a fixed-cost equipment item, such as computers, it makes sense to take an unsecured term loan. You know that the item plays a vital role in the success of your business so you’re okay with the fixed payments.
Let’s say that you know you will also need funding within the next 6-12 months for marketing, recruiting, additional inventory, etc. In this case, opening a revolving line of credit alongside your term loan is going to make more sense than taking out an additional term loan. With a term loan, you take the money up-front and make fixed monthly payments on it. With revolving credit, you have access to money that you can use whenever you’re ready for it.
Now, when does it make sense to avoid the term loan entirely and go for revolving lines of credit? If you find that you need funding but you’re not sure when, or even how much, it makes more sense to pursue funding in the form of revolving lines of credit. This way, the money is available to you when you need it, and you won’t find yourself making payments on it before you’re ready.
This is an especially important question for those of us in real-estate investing or trucking. In these industries it’s imperative to have access to as much capital as possible in order to make the biggest profit. You can never have too much money in trucking or Real Estate, so it makes sense to take both revolving and fixed credit.
The bottom line is that you need to know where your money is going before taking out a fixed rate term loan. If you’re not sure what your expenses will be down the road, then it’s wise to take out a revolving line of credit at 0% interest for the first year.
There is no tool more powerful to building your business than 0% funding.